Alphawave IP: 'Europe’s best AI play'?

Alphawave IP (AWE) designs chips that allow high-speed data transfer. It has a similar business model to ARM (US:ARM), in that it licenses these designs to other companies rather than doing the manufacturing itself.

The case for high-speed data transfer is growing as excitement builds around artificial intelligence (AI). This has helped drive demand for Alphawave’s designs. Last year, new bookings rose 68 per cent to $384mn (£310mn). Of these bookings, over 80 per cent are in advanced nodes – which means "7nm and below", essentially one of the latest process nodes in chip production. In other words, it is operating at the cutting edge of the AI industry, which as TSMC’s (TW:2330) recent results show, is the fastest-growing part of the semiconductor industry.

However, Alphawave's growth has slowed in the first quarter of this year, with new bookings up by just 20 per cent year on year. Licensing fees still rose 75 per cent in Q1, but royalties were down 75 per cent as Alphawave “actively de-prioritised the legacy lower-margin silicon business from Chinese customers”.

Increased R&D spending, marketing costs and a big jump in share-based compensation meant there was an operating loss of $52.9mn in 2023, a big swing from an operating profit of $2.5mn in 2022. However, when the $40.7mn of compensation is stripped out, plus a couple other metrics, adjusted cash profit (Ebitda) was up 34 per cent.

Management is expecting to start benefiting from the capital-light business model in the next few years. It is guiding for $450mn of revenue in 2025, and is expecting to make around $100mn of adjusted cash profit, which would be an increase of around 60 per cent from this year.

FactSet broker consensus is for earnings per share (EPS) to rise to 12¢ by 2026, giving a 2026 price/earnings (PE) ratio of 11. Previous rapid growth had encouraged Jefferies brokers to describe Alphawave as “Europe’s best AI play”. That was prior to the company making a significant downgrade to earnings expectations last week ahead of these results, but there is still reason to be optimistic about its long-term prospects. Buy.

Last IC view: na